Insurance & Takaful

Sunday, April 26, 2009

General insurance is an insurance policy other than ‘Life Insurance’. The coverage period for most general insurance policies and plans is usually one year, whereby premiums are normally paid on a one-time basis. However, there are few products that are long-term.

The risks that are covered by general insurance are:• Property losses, for example, stolen car or burnt house• Liability arising from damage caused by yourself to a third party• Accidental death or injury• Errors and Omission insurance for professionals• Credit insurance

The general or non-life companies also offer policies covering machinery against breakdown, there are policies that cover the hull of ships and so on. A Marine Cargo policy covers goods in transit including by sea, air and road. Further, insurance of motor vehicles against damages and theft forms a major chunk of non-life insurance business.

In respect of insurance of property, it is important that the cover is taken for the actual value of the property to avoid being imposed a penalty should there be a claim. Where a property is undervalued for the purposes of insurance, the insured will have to bear a rateable proportion of the loss. For instance if the value of a property is RM100,000 and it is insured for RM50,000, in the event of a loss to the extent of say RM50,000, the maximum claim amount payable would be RM25,000 (50% of the loss being borne by the insured for underinsuring the property by 50% ). This concept is quite often not understood by most insureds.

Personal insurance covers include policies for Accident, Health etc. Products offering Personal Accident cover are benefit policies. Health insurance covers offered by non-life insurers are mainly hospitalization covers either on reimbursement or cashless basis. The cashless service is offered through Third Party Administrators who have arrangements with various service providers, i.e., hospitals. The Third Party Administrators also provide service for reimbursement claims. Sometimes the insurers themselves process reimbursement claims.

Accident and health insurance policies are available for individuals as well as groups. A group could be a group of employees of an organization or holders of credit cards or deposit holders in a bank etc. Normally when a group is covered, insurers offer group discounts.

Liability insurance covers such as Motor Third Party Liability Insurance, Workmen’s Compensation Policy etc offer cover against legal liabilities that may arise under the respective statutes— Motor Vehicles Act, The Workmen’s Compensation Act etc. Some of the covers such as the foregoing (Motor Third Party and Workmen’s Compensation policy) are compulsory by statute. Liability Insurance not compulsory by statute is also gaining popularity these days. Many industries insure against Public liability. There are liability covers available for Products as well.

There are general insurance products that are in the nature of package policies offering a combination of the covers mentioned above. For instance, there are package policies available for householders, shop keepers and also for professionals such as doctors, chartered accountants etc. Apart from offering standard covers, insurers also offer customized or tailor-made ones.

Suitable general Insurance covers are necessary for every family. It is important to protect one’s property, which one might have acquired from one’s hard earned income. A loss or damage to one’s property can leave one shattered. Losses created by catastrophes such as the tsunami, earthquakes, cyclones etc have left many homeless and penniless. Such losses can be devastating but insurance could help mitigate them. Property can be covered, so also the people against Personal Accident. A Health Insurance policy can provide financial relief to a person undergoing medical treatment whether due to a disease or an injury.

Industries also need to protect themselves by obtaining insurance covers to protect their building, machinery, stocks etc. They need to cover their liabilities as well. Financiers insist on insurance. So, most industries or businesses that are financed by banks and other institutions do obtain covers. But are they obtaining the right covers? And are they insuring adequately are questions that need to be given some thought. Also organizations or industries that are self-financed should ensure that they are protected by insurance.

Tuesday, April 21, 2009

Consumers often complain about processing delays in their insurance claims. More often than not, the stumbling blocks in the claim process are insufficient information given on the claim form, lack of supporting documentation or the lack of understanding on what the policies actually cover.The most common general insurance policies purchased by consumers are motor policies. By knowing what to do would help alleviate some of the anxiety that comes with the incident as well as ensure a speedy claims process.

Checklist what to do after an accidentIf you are involved in a road accident, at least you should do the following:· Avoid argument, controversy or dispute;· Find out anybody injured and ask for help to send the injured to the nearest hospital;· Record registration numbers of all vehicles involved including model, make and colour;· Record name of insurance company, policy/certificate of insurance/cover note number of the other vehicles;· If possible, take down names, addresses, I/C no. and telephone no. of the other insureds;· Record names and addresses of any witnesses;· Note the extent of damage to your vehicle and any bodily injuries;· Note the surrounding area, if possible sketch plan of the place of accident including name of the road, road sign, any road junction, landmark, time and date of accident. These information are required when you make a police report;· Do not admit liability;· Lodge a police report within 24 hours; and· Notify your insurer and the third party insurer (if you are making a third party claim) immediately.

Making third-party claimIf you are making a claim against a third party, you would need to notify the other driver in writing of your intention to claim from him and ask him to notify his insurer. You should also insist on him to make his own police report, otherwise you will face problem in making claim against his insurer. The other driver should notify his own insurer of the accident as his insurer will only be able to deal with your claim if they have been asked to do so by their policyholder. Otherwise, his insurer will not entertain your claim until the third-party notify them.Checklist for making third party claim:In addition to the above procedure on making own damage claim, the additional procedure for making third-party claim are as follows:· Notify your insurer of your intention to claim third-party insurer;· Notify third-party insurer informing your intention to claim and giving policy number of their insured;· Additional documents to be submitted:i) Police report of the third-party;ii) Result of the police investigation of the accident;iii) Sketch plan and keys as provided by the police;iv) Insurance adjuster’s report; andv) Receipts.

These are the minimum documents required to be submitted otherwise it would contribute to the delay in processing of claim for lack of supporting documents as mentioned in the first paragraph.Under the recent PIAM Circular, you can also make third-party claim through your insurer. However, your insurer only pays the cost of repair to your vehicle. As for consequential loss, like loss of use and excess, you have to make third-party claim against third-party insurer. As for NCD (Non Claim Discount), you should not suffer any loss when making third-party claim through your insurer as the accident was due to third-party fault. The result of the police investigation will prove this.

Checklist when making windscreen claimProvide the following documents when making windscreen claim against your insurer:· Claim form;· Original police report;· Copy of your I/C and driving license· Photographs of damaged windscreen before repair;· Original cash repair bill/invoice; and· Copy of vehicle registration card.

When making your police report, provide the police with whatever information they require and obtain a copy of the report. Contact and inform your insurance agent or insurance company regarding the accident and seek advice on what additional forms or documents are required to support the claim.

How soon should you call your insurer?Insurance companies expect you to do this as soon as possible. Any unreasonable delays may prejudice your case. The best advice would be that when in doubt, it is better to notify your insurer sooner rather than later.If someone else is claiming against you for damage to their property or for personal injury, it is very important to contact your insurance company immediately. You will be told what to do and it is very important to follow the instructions given. You should also be prepared to be charged by the police as the accident is due to your fault. Normally, you will be compounded if the accident is minor and does not involve injury or death to third party.

What about repairs?In a motor accident where your car is considerably damaged, the first step is to ascertain whether your policy covers damage to your vehicle. If yes, take your car to a PIAM-authorised repairer and inform your insurer immediately that you have done so. If your insurer recommends or requires that repairs be done at a specified workshop, then take your car there as advised. Any estimates should be sent to your insurer for checking purposes.Alternatively, the insurer will send an insurance loss adjuster to assess the damage to your vehicle, after which the insurer will authorise repairs. The insurer will authorise repairs subject to a satisfactory claim form being submitted together with the relevant documents.If you have an 'excess' on your policy, you must pay the amount of the "excess" direct to the repairer. The "excess" is that part of the claim that you have agreed will be borne by you. Check your insurance policy for this "excess" amount. The excess is payable irrespective of who is to blame.

Checklist of items to remember about motor insurance:· Read your policy, and pay particular attention to advice on claims and conditions that apply.· It is your responsibility to keep your vehicle in good order. An insurance policy does not cover the costs of maintaining your vehicle.· You have to take reasonable steps to prevent a loss occurring - and, if it happens, to do what you can to prevent further damage.· It is up to you to understand the extent of your coverage. Your insurance company will be able to assist you on this matter.· Get in touch with your insurance company promptly and take their advice on what you should do.· Your insurance company will deal as quickly as possible with your claim but this will also depend on getting estimates and other information they need to assess the claim, which can take time.

There are sensible ways to save money on insurance, but skipping coverage when you really need it isn't one of them. Your unexpected death will cause your family a lot of grief – you don’t want to add financial difficulty to their burden. Even if you don’t die, medical bills from even a minor car accident can deplete your savings – a major illness can push you into bankruptcy.

2. If your employer offers insurance, grab it.

Group coverage, particularly when it's employer-subsidised, is almost always a better deal than anything you can get on your own, even if you're young and healthy. And if you're NOT young and healthy, it's definitely a better deal.

3. Know what’s on offer.

In life assurance, there are Term policies, which provide pure insurance coverage, and then there are the many variants of Endowment policies and Whole Life policies, which combine a savings and investment product with pure term insurance and build cash value. Health insurance is still new in Malaysia, but it is helpful to know the different types of cover available.

4. Insurance is sold, not bought.

Agents sell the vast majority of policies written in Malaysia because the insurance industry has a vested interest in pushing high-commission (and high-profit) policies. Knowing the products better will help you get a better deal and prevent yourself from being conned.

5. Endowment and Whole Life is expensive.

Policies with an investment component, especially investment-linked policies, can cost many times more than Term policies. As a result, people who buy these policies often can't afford an adequate face value, leaving themselves under-insured.

6. Investment-linked products are built on assumptions.

The returns quoted by the agent are simply guesses – not reality. Nobody can accurately predict what interest rates and returns on equity will be like for the next 20 or 30 years. Some companies keep these guesses of future returns on the high side to attract more buyers, so beware.

7. Keep your investing and insurance strictly separate.

If you can manage your money, it is best to invest it yourself or leave it to the experts, i.e. asset management firms or unit trusts. There are far better places to invest than in insurance companies, and without the high commissions of insurance policies.

8. Buy enough coverage to fill your needs.

Life insurance is no place to skimp, especially when you need the cover. The lowest premium isn't always the best value for money. What your insurance covers is just as important as, and sometimes more important than, what you pay up front. Ultimately, the best plan is the one with the lowest price for the benefits you're most likely to use.

9. Take prudent risks.

If you are generally healthy and use few medical services, you can cut premium costs substantially by buying ‘catastrophic’ coverage. These usually come in the form of indemnity policies with a very high excess clause, perhaps as much as RM2,000. Assuming this much financial risk can slash your premium by 50% or more, depending on your age. Don't trim your premium by reducing coverage on the other end, though. Make sure your insurance has a high maximum payout, to cover yourself if the worst happens.

10. Match the term of the policy to your needs.

You want the policy to last as long as it takes for your dependents to leave the nest, or for your retirement benefits to materialise.

11. Buy when you're healthy.

Older people and those not in the best of health pay higher rates for life insurance. So buy as early as you can, but don't buy until you have dependents or need the coverage.

12. Tell the truth.

There's no sense in shading the facts on your application to get a lower rate. Be assured that if a large claim is made, the insurance company will investigate before paying.

13. Comparing plans is tough but necessary.

Unfortunately, there is no such thing as standard coverage in personal insurance. Benefits and costs vary widely from plan to plan. If you have choices, you'll have to examine each one closely and shop around to find the best deal. As long as you're healthy and under 50, insurers want your business.

14. Working couples have more to think about.

If you and your spouse both get health insurance at work, you must sort out whether it makes more sense to have two policies or for one of you to cover the other. If you have kids, you need to decide who's going to cover them.

15. Tax breaks can help.

Medical expenses are not tax deductible. But life insurance premiums are, up to a maximum of RM5,000 p.a.

Now that we have an idea of what types of policies are available, how do we decide on which type to buy? How much coverage should we get? How long a term should we cover? This section aims to give the reader the low-down on how insurance is sold, plus some sound advice on optimum buying strategies for the individual.

It’s all about the moneyPersonal Insurance is a highly competitive business, in which the sales force depends almost entirely on commissions. Certain types of policies will be more expensive in terms of the coverage received, mostly because of the commission structure.Insurance companies pay larger commissions to agents for selling Endowment policies than for Whole Life and Term policies, since the larger savings element in Endowment policies allow the company to invest the extra money you put in and take some of the gains for themselves.

How much coverage do I need?There is no one answer to how much coverage is enough. Some financial planners advocate a sum assured of between 5 to 7 times your annual salary for a life assurance plus a suitable amount for health insurance, but this may not be suitable for everyone as needs vary from one individual to another.What is important is to remember the sole purpose of insurance – to replace your income in case you die, become unable to earn a living, or fall ill, so that your dependents can maintain their current lifestyle.To calculate how much life assurance coverage you require, consider all your income and expenses.For expenses, the factors to consider are:· How many dependents do you have? This includes your spouse, children still living with you, aged parents and extended family, if applicable.· What are the monthly expenses incurred by these dependents? This should include living expenses, childcare, and education.· Do you have any outstanding debts? A provision must be made for paying off your housing loan, car loan, credit card debt, and any bank overdraft.· Do you contribute to an education fund for your children, or other forced-savings products?· How much do you estimate your uninsured medical costs to be? Don’t forget the possibility of critical illnesses that require expensive long-term treatment such as kidney failure or cancer.· How much do you expect your funeral to cost?· Don’t forget to factor up all the above costs by an average of about 4% p.a. for inflation. At this rate, the price of almost everything will double every 18 years.

For income, the factors to consider are:· What fixed assets do you currently own?· How much do you have in savings and investments? What is the rate of return you expect?· Does your spouse earn an income?· Don’t forget to account for any capital gains tax, and income tax on the sale of your assets or on your investment income.It’s worth noting that many people who buy life assurance are under-insured. Because of the savings and investment component of popular Endowment and Whole Life policies, premiums are much higher than for Term policies. To make up for this, many people simply buy less coverage, which defeats the purpose of buying insurance in the first place – to ensure that dependents can maintain their current lifestyle should the worst happen.

How long a term?The term really only applies to Term Assurance policies. Most people don’t need life insurance coverage throughout their life. The secret to buying a policy with the right term is to figure out how long you need to be insured.Start by estimating when your children will be out on their own and no longer need your financial support. Then look at when you expect to pay off all your loans. Finally, consider your expected retirement age or when your retirement benefit such as state pension or EPF becomes available. All these factors should give you a rough idea of how long you need coverage for.

It’s a matter of health, tooInsurance may be difficult and expensive to obtain if you are not in good health. If you have a heart condition, or are grossly overweight, you may be declined insurance or be charged an extra premium. One company may charge more than another, depending on how it estimates the risk of your condition (this risk assessment process is called underwriting).So there’s a good case to be made for getting a life policy early in life while you are still in good health. However, it doesn’t make much sense to buy one until you have dependents or debts.

An investment-linked (IL) assurance is a relatively new product in Malaysia. The first IL policy was issued in the UK in 1957 under the name “unit-linked policy”, and in the US in 1976 as a “variable-life policy”. In this region, IL products first appeared in Singapore in 1973, while Malaysian policyholders were only offered IL products since 1997.

An Investment-linked assurance policy is basically a combination of investment and the pure insurance protection. It’s true that some traditional life assurance products such as the Endowment, and to a certain extent the Whole Life, are themselves not pure insurance protection products and they do contain a savings element too. However, this is to be differentiated from the investment element of an IL product, which caters for more aggressive capital growth and forms a larger proportion of the policy, compared with the traditional with-savings life assurance products. In fact, the investment portion of an IL policy may be as high as 90% of the net premiums, meaning that only 10% goes towards purchasing insurance protection for the insured person.The investment portion may be invested in a number of funds which are being managed by the insurance companies. The types of funds commonly available are similar to those being offered on the unit trust market, such as equity funds (aggressive growth, higher risk), fixed income funds (investment in low-risk securities), and balanced funds (a mix of the two, medium risk). Several companies also offer Syariah or Islamic funds.All IL assurance policies are non-participating policies. Any surplus arising out of the insurance fund belongs to the insurance company, but this is usually not an issue since the insurance portion is normally quite small.

How Do IL Products Work?Essentially, an IL assurance policy can be imagined to consist of two parts : the unit portion, and the non-unit portion.Every premium that is paid is divided into the two portions according to a pre-determined ratio, after deducting the cost of providing any additional rider coverage, expenses and commissions. This ratio is dependent on the sum assured required (the insurance protection part of the policy), and the age and risk rating of the insured person. The higher the sum assured required, or the higher the age and risk, the higher the ratio to the non-unit portion will be. The balance of the premiums paid will go into the unit portion (the investment part of the policy). Some of the products offered allow the policyholder to change the sum assured required, which effectively changes the ratio of protection to investment. This allows the policyholder to maximise investment opportunities when capital markets are favourable, and to maximise insurance protection when it is most needed.It is called the unit portion because the balance of premiums being paid in will be unitised in the investment fund of the policyholder’s choice. Unitisation is a process of converting ringgit value to number of units, at the current unit price of the chosen fund. The unit price is calculated as the total net asset value of the fund divided by the total number of units.Policyholders may transfer the value of some units to the non-unit portion of their policy to increase the sum assured, or even withdraw some of the money invested in the unit portion by ‘cashing-in’ some of the units held in their account. However, there is a ‘penalty’ in the form of a bid-offer spread, which is the difference between the buying price and selling price of units – this is typically 5%. In addition to this, the insurance company (or fund manager) will charge an annual fund management fee on the total units held – this is typically 1.5%.

What Are The Policy Benefits?There are two ways in which the death benefits of an Investment-Linked assurance may be structured. Upon death of the insured, one of the following will be paid out :Type 1 : Value of units in unit portion + Sum assured of non-unit portionType 2 : The higher of the value of units or the sum assuredType 1 policies are more common in annual premium plans where premiums are paid regularly, while Type 2 policies are more common in single premium plans where premiums are paid in one lump sum at the inception of the policy.If a policyholder wishes to surrender (terminate) an IL policy, the cash value of the unit portion plus the value of units will be returned, after deducting any surrender penalty and the bid-offer spread.Can I Purchase Riders With An IL Policy?Almost all companies will allow some riders to be attached to the basic IL policy. The types of riders available are similar to those offered with the traditional life assurance policies.

An assurance is the foremost type of life insurance. It deals with the contingency of death or survival of a human life, i.e. benefits are paid upon the death or the survival of the insured person. The date of death of the insured person is a focal point in determining the time that benefits will be paid out. In the Malaysian context, this section deals entirely with Conventional Assurances only. Takaful assurances will be discussed in the Takaful section.Assurance policies may be participating or non-participating. A participating policy is one that subscribes to the performance of the insurance company. If the company does well for the year, a bonus may be paid out to the policyholders in the form of cash, or an increase in the amount of policy benefits. A non-participating policy is one where any surplus arising out of the policy belongs to the insurance company, and the price is usually cheaper than an equivalent participating policy.Assurances are also broken up into Ordinary Life and Home Service policies. Ordinary Life policies are the standard life assurance policies where premiums were paid annually, semi-annually or quarterly. The premiums for Home Service policies were usually collected more frequently (as often as weekly), and they catered for policies with lower sums assured. The vast majority of assurances sold today in Malaysia are OL policies, while HS policies were more popular in the past when the typical policyholder had lower incomes.

Types of Life AssuranceMost of the life assurance products available today fall under one of the following classes:· Whole Life· Term· Endowment

Whole Life PolicyIn a Whole Life policy, the sum assured is paid upon death of the insured person, whenever it occurs. Level premiums are usually payable throughout the life of the insured person, but may cease at retirement or some other pre-agreed age (depending on the individual policy). You may also choose to pay a single premium at the start of the policy, instead of having to arrange regular premium payments.

Term PolicyA Term policy is similar to a Whole Life policy, except it operates only within a fixed period of time. The sum assured is paid upon death of the insured person, but only if the death occurs within the stipulated term (eg. 20 years). Premiums are usually payable throughout the term. If the insured person survives to the end of the term, the policy expires – no benefit will be paid, and no further premiums will be payable. Again, you may also choose to pay a single premium at the start of the policy, instead of having to arrange regular premium payments.A special kind of Term assurance is the Reducing Term Assurance. This is usually a single-premium policy, i.e. a single premium is payable at the start of the policy. But the sum assured is reduced over time (usually reduced annually), so the premium is significantly lower than for a regular Term policy of the same term.A common form of this is the Mortgage Reducing Term Assurance (MRTA), which is designed to cover the outstanding balance of a housing loan. As the borrower repays the loan amount, the sum assured is correspondingly reduced year by year, and the MRTA policy expires at the same time as the housing loan is fully paid back. This ensures that an insured person’s dependents will still have a roof over their heads should their breadwinner die unexpectedly.Another kind of Term assurance is the Annually Renewable Term (ART), in which the term is fixed at one year. A premium is payable at the start, and the sum assured is paid if death occurs within the year. As long as the policy is renewed annually without lapse, the amount of premium payable for all future terms will be maintained at the same level.

Endowment PolicyAn Endowment policy is a Term policy with a larger element of savings. The sum assured is paid upon death of the insured person or upon maturity, whichever comes first. This means that the sum assured is paid regardless of whether the insured person dies within, or survives to, the stipulated term. Level premiums are usually payable throughout the term, and these tend to be higher than for a normal Term policy due to the additional survival benefit. The cash value of an Endowment policy is, at any time higher than an equivalent Term policy, which reflects the larger proportion of savings to life coverage.

Types of RidersRiders are add-ons that you can purchase to enhance the benefits of your basic life assurance policy. There are Life Riders, and Non-Life Riders. Some examples of Life Riders are the term rider (works just like an additional term policy), family income rider (pays a regular benefit for a period of time to the family of a deceased insured person), and bonus riders. Some examples of Non-Life Riders are the personal accident rider (pays another sum assured upon death or injury due to accidental causes), hospitalisation & surgical rider (pays for surgical costs and/or a regular benefit as long as the insured person is hospitalised), and the dread disease rider (pays a benefit if the insured person is diagnosed with any of a list of scheduled diseases).Riders only operate as long as the basic policy is inforce, and cannot be purchased on their own. However, some of the Non-Life Riders may be purchased as standalone policies – Health and Personal Accident, for example.

AnnuitiesAnnuities are policies that pay a regular benefit as long as the insured person is alive, in return for an upfront single premium. An annuity can be seen as the reverse of a life assurance – instead of paying regular premiums to get a lump-sum benefit upon death, the insured, who is called the annuitant, now pays a lump-sum premium at the start to receive regular benefit payments until his/her death. Annuities may be immediate (benefit payments start immediately) or deferred (benefit payments start at an agreed time in the future, usually the retirement age).The major differences between assurances and annuities are:- Assurance benefits are paid after death; while annuity benefits are paid while the insured person is still alive.- Assurances cover the possibility of death occuring earlier than expected; while annuities cover the possibility of death occuring later than expected.Annuities vary in shape and form, and many annuity products available today also include an amount of death benefit or income benefit within the policy.As with assurance policies, annuities too may be participating or non-participating. A participating annuity is one that subscribes to the performance of the insurance company. If the company does well for the year, a bonus may be paid out to the annuitants in the form of an increase in the amount of annuity benefits. A non-participating policy is one where any surplus belongs to the insurance company, and the price is usually cheaper than an equivalent participating annuity.In Malaysia, the only annuity product available is the EPF Annuity Scheme, which essentially consist of participating deferred and participating immediate annuities. There are differences between the Conventional Annuity and the Takaful Annuity, but these will be discussed in the Takaful section.

It’s an assurance. No, it’s an annuity. No…As more sophisticated products are being developed, the lines between these classes of products are blurring. Many of the best-selling policies are ‘hybrid’ policies that incorporate elements of life assurance and annuities. This is done to cater for the needs of specific markets, and adds to the perceived-value of the policies, which translates to higher sales.

Thursday, April 9, 2009

Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed small loss to prevent a large, possibly devastating loss. The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums.

An insurer is a company selling the insurance; an insured is the person or entity buying the insurance. Insurance is designed to protect the financial well-being of an individual, company or other entity in the case of unexpected loss. Some forms of insurance are required by law, while others are optional. Agreeing to the terms of an insurance policy creates a contract between the insured and the insurer. In exchange for payments from the insured (called premiums), the insurer agrees to pay the policy holder a sum of money upon the occurrence of a specific event. In most cases, the policy holder pays part of the loss (called the deductible), and the insurer pays the rest. Examples include car insurance, health insurance, disability insurance, life insurance, and business insurance.

The major operations of an insurance company are underwriting, the determination of which risks the insurer can take on; and rate making, the decisions regarding necessary prices for such risks. The underwriter is responsible for guarding against adverse selection, wherein there is excessive coverage of high risk candidates in proportion to the coverage of low risk candidates. In preventing adverse selection, the underwriter must consider physical, psychological, and moral hazards in relation to applicants. Physical hazards include those dangers which surround the individual or property, jeopardizing the well-being of the insured.

The amount of the premium is determined by the operation of the law of averages as calculated by actuaries. By investing premium payments in a wide range of revenue-producing projects, insurance companies have become major suppliers of capital, and they rank among the nation's largest institutional investors.